More Cuts Expected After Tenth Trim In Russia

123jump.com Staff
25 Dec, 2009
New York City

Russia lowered its key lending rate by 25 basis points. The tenth rate cut comes after the economy shrank at record 10% in the first half and is expected to decline more than 8% in the year. Rubles edged up against the dollar and the euro and the central bank said risks of inflation above the target rates are small.

[R]6:30 PM Moscow, Russia – Russia lowered its key lending rate by 25 basis points. The tenth rate cut comes after the economy shrank at record 10% in the first half and is expected to decline more than 8% in the year. Rubles edged up against the dollar and the euro and the central bank said risks of inflation above the target rates are small.[/R]

Russia lowered key lending rates for the tenth time this year since April as the country struggles with the largest economic decline in a decade.

Bank Rossii lowered its key refinancing rate by 25 basis points to 8.75% effective Monday and the lowest one-day repo rate to 6%. Rates in April were 13%.

The latest rate cuts are not expected to spur lending as banks have essentially stopped lending to small and medium sized businesses and consumers.

Russian economy has struggled in the first half as the commodities prices declined and exports of metals, ores and energy shrank. The economy in the second quarter dropped 10.9% and in the third quarter 8.9% but is expected to shrink at a slower pace in the current quarter.

Russia is targeting 4% or more of economic growth in the next year and hopes that lower rates will spur lending as global markets recover.

Most businesses are paying rates between 14.5% and 16% according to local banks.

Russia is battling high inflation as consumer prices surge at a rapid clip in the last three months. The latest data from the Federal Statistics Services showed 9.1% increase in November. Unemployment is at 8.1% and sharp cuts in rates have not lifted consumer spending.

The International Monetary Fund has urged the central bank to focus on curbing inflation and increase productivity in the economy. The IMF prefers to lower inflation target to 5% or below in 2010.

The ruble increased against the dollar to 29.47 and to one euro at 42.59 after the rate cut and the central bank said that the risks of inflation overshooting the target rate set by the ministry of finance between 6.5% and 7.5% are “insignificant.”